Automatic Stay

Posted in Finance, Accounting and Economics Terms, Total Reads: 525

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Definition: Automatic Stay

A legal provision aimed at stopping all creditor actions, including foreclosures, as soon as a debtor files for bankruptcy protection. It also prohibits filing of lawsuits against the company and limits the ability of creditors to dispose of collateral held as security.

It is a temporary provision, since the creditors who are confident that they have sufficient grounds can move the court to lift the automatic stay, in order to continue the collection process. The automatic stay however, when in effect prevents creditors from

• beginning or continuing judicial proceedings against the debtor,

• making collection calls or repossessing or foreclosing on property until the debts are discharged (or not) or the bankruptcy judge lifts the stay.

If the creditor can show that the stay does not give the creditor ‘protection which may be adequate’ or if it leads to jeopardization of the creditor’s interest in certain property, a court may give a creditor relief from the stay. This relief to the creditor may be in the form of periodic cash payments or an additional or replacement lien on the on the property.

It is highly unlikely that the creditors will receive the full amounts they are owed once an automatic stay is in effect. The creditors shall receive a proportional share of the bankrupt debtor’s assets which might be limited. On the other hand a debtor may sue a creditor who continuously tries to contact them or who try to sue them after an automatic stay is in place.

Here are two simple examples demonstrating the effect of Automatic stay. If you have not paid your utility bill within the stipulated time frame and the company or government or the utility provider is threatening to disconnect your water, electricity, gas, or telephone services, the automatic stay will prevent the disconnection for at least 20 days.

From the point of view of the creditor, as to how to deal with this provision, here is another example. Suppose you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you won’t be able to pay your mortgage arrears and you have no way of keeping the property. The foreclosing creditor would obviously go to court soon after you file for bankruptcy and ask for permission to proceed with the foreclosure -- and that permission is likely to be granted.

Hence, this concludes the definition of Automatic Stay along with its overview.

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